Oram: Fonterra's burning issue

ROD ORAM ORAM@CLEAR.NET.NZ
Last updated 05:00 15/09/2013
coal
CLEAN AND GREEN? When it comes to energy, Fonterra is distinctly retro.

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Can white gold and black gold co-exist? Yes, says Fonterra. Milk and coal mix just fine.

Fonterra owns and mines coal; and it wants to build a new mine on the southern slopes of the Hunua Ranges near Auckland to help power three of its Waikato milk driers.

But what might its consumers say, here and abroad, if they knew? Since coal is the dirtiest fuel around, they might expect Fonterra to lead in seeking alternatives. There are. But it is not.

This is a local example of a global problem. The proven reserves of oil, gas and coal companies are more than double the volume we could ever burn if we want to try to limit climate change to less than 3 degrees Celsius.

This is not just an environmental disaster under way. It is also an investment disaster. HSBC and some other investment banks estimate share values of fossil fuel companies will fall by between 40 per cent and 60 per cent when investors get the message. Hence, there is a worldwide campaign to push pension funds and the like to divest from fossil fuels to avoid the capital loss and to speed development of alternatives.

Our dairy industry is deeply exposed to these environment, brand and economic issues. In Fonterra's case, of its eight South Island plants, coal powers seven and fuel oil one. Of its 19 North Island plants, three burn coal and the rest rely on gas, which has a lower carbon footprint than coal but is still subject to the same fossil fuel pressures.

Coal is one of the dairy industry's three massive environmental liabilities, alongside polluted waterways and palm kernel feed from deforested land overseas.

So far, Asian consumers care far more about food purity than environmental quality, research shows. But with ever-worsening smog blankets over their cities, anger and anxiety is escalating.

China is responding. The government's successive five-year plans are achieving very ambitious targets to reduce the carbon intensity of the economy. For example, China is already the world's largest maker of equipment for solar electricity, solar water heating and wind power. Thanks to higher standards, it has a more fuel-efficient vehicle fleet than the US.

Could New Zealand in general, and the dairy industry in particular, make more of an effort? Fonterra says it is doing all it can. It has reduced its energy use per tonne of finished product by 18 per cent since 2003 and plans a further 20 per cent reduction by 2020.

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To help reduce carbon further, it has studied and trialled burning biomass, typically residue from forest logging. Biomass powers one small plant at Tirau in the Waikato.

But the economics and practicality of switching from coal to biomass at three large plants to save opening the new mine don't stack up, its expert witnesses told the consent hearing three weeks ago.

That's largely right, replied John Gifford, a former bioenergy team leader at Scion, the forestry crown research institute, who gave expert evidence for the Coal Action Network, which opposes the mine.

But that's only for the next 18-24 months, he said. If Fonterra looked beyond the short-term, it could develop a strategy to ramp up biomass in the Waikato and around the country.

The case for biomass is well and widely made, not the least by EECA, the Government's energy efficiency agency. Its biomass portal is http://bit.ly/15TCfdg

If Fonterra got serious about this, it would play a vital role in developing the biomass market and supply chains to the benefit of its shareholders and the wider economy and environment. Meanwhile, to fill the gap it could buy coal from existing Waikato mines owned by Solid Energy and others, rather than opening a new one of its own on farmland.

Fonterra also has a deeper strategic issue of lost value. It collects and processes its shareholders' milk in massive bulk, and likewise sells the resulting products.

Physically and financially it can't differentiate any of the milk by, say, a higher environmental standard on farm and from using biomass, and then reap the marketplace reward for the farmers who meet the standards.

Instead, it is Synlait, a young and nimble player in the South Island, which is showing how to make higher environmental standards pay as a way of partially decommoditising milk.

Such price and investment mechanisms are also utterly crucial for accelerating the world's drive to sustainability, economic and environmental. This is why Investor Watch of the UK initiated its Carbon Tracker study of the world's 200 largest stock market-listed oil, gas and coal companies.

Unburnable carbon 2013 - Wasted capital and stranded assets is its latest report, available at carbontracker.org/wastedcapital. Its partner was the Grantham Research Institute, an offshoot of the London School of Economics headed by Lord Stern, the distinguished author of a definitive study of climate change economics.

Fossil fuel companies account for 7-8 per cent of world stock market capitalisation. They out-performed the markets in the run-up to the Global Financial Crisis but have under-performed since.

A study in June by MSCI, the world's leading provider of stock market indices, showed that world markets without carbon stocks delivered a 1.2 per cent higher return than world markets with them between January 2008 and March 2013. The report is available at http://bit.ly/18VLYkg

But investors will suffer a far bigger loss on carbon stocks when markets wake up to the reality of the companies' unburnable reserves of oil, gas and coal.

Two of our biggest investors in New Zealand, the Superannuation Fund and ACC, have fossil fuel shares representing 7.67 per cent and 8.5 per cent of their equity portfolios respectively, according to research by the World Wildlife Fund NZ, available at http://bit.ly/15Sl6GX

The Super Fund says it is keeping a watching brief but is not minded to act.

Globally, some other institutional investors are acting decisively to protect their wealth and to lead the shift away from fossil fuels. Locally, the Anglican Diocese of Auckland voted last weekend to do likewise with its own investments.

This is the sort of leadership the world and New Zealand urgently need. Ducking the issue is deeply irresponsible behaviour by Fonterra and the Super Fund.

Disclosure: Rod Oram is a member of the synod of the Anglican Diocese of Auckland; he helped develop the research and motion on fossil fuel divestment.

- Sunday Star Times

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